Marcellus Shale output expected to keep rising

Fewer rigs but more production are headed for the Marcellus Shale, said Katie Jolly, an energy analyst with Bentek Energy.

Bentek, a Colorado-based energy research firm, projected the shale play’s daily output will increase by 77 percent over the next five years. Half of that will come from dry gas counties in northeastern Pennsylvania; the other half from Ohio, West Virginia and several prolific counties in southwestern Pennsylvania, where Marcellus gas is rich with natural gas liquids.

The Aug. 1 release of 2010 production and reserves data by the U.S. Energy Information Administration has prompted much speculation that the Marcellus Shale will soon be the most prolific shale play in the country.

It showed Marcellus production, which was nearly nonexistent in 2008, grew to 476 billion cubic feet in 2010. That’s still lower than the output from the Barnett, Haynesville and Fayetteville shales, but the local shale play appears to be ramping up at a much faster rate than the others. Marcellus reserves also spiked from 102 billion cubic feet to 13,199 bcf between 2008 and 2010, according to the report.

The Marcellus reserves increased because the rush in drilling activity over the past several years has provided scientists with better data to estimate what’s in the ground. That means year-over-year reserve spikes are most drastic in younger plays, such as the Marcellus, and tend to even out as drilling concentrates around the core areas of different plays.

But just because the gas is known to be in the ground doesn’t mean it necessarily qualifies as proved reserves. For that to be true, companies have to be able to get it out using available technology and be willing to do so in the current economic environment.

For that reason, the agency warned the plummeting natural gas prices of the past year — a thousand cubic feet of gas went from around $4.50 in the beginning of 2011 to around $3 by its end — will likely shrink proved reserves estimates in the next report.

Jolly said it will still be years before the Marcellus grabs the No. 1 spot in shale production, but she expects drilling in the play to continue to increase for two reasons.

In dry areas, where drillers break even at gas prices above $3.50, the backlog of some 1,100 wells that have been drilled but not yet hooked up to pipelines will add to production as those come online.

In wet areas, which contain natural gas liquids that can be sold separately, a $2.50 gas price suffices for profits, so they are a natural draw for companies looking to reallocate resources to the most lucrative spots.

“The dollars are always chasing the liquids,” Jolly said.

In its short-term energy outlook released Aug. 7, the EIA said it expects some production decreases during the rest of 2012, associated with low natural gas prices and decreased rig counts.

Nevertheless, the Marcellus, especially the rock underlying southwestern Pennsylvania, looks poised to survive the dip as companies pull away from drier areas and concentrate on the wet ones.

Range Resources is a good example of that. The Texas-based company sold its Barnett Shale properties in April 2011 to concentrate capital on Marcellus holdings.

David Amend, Range’s manager of investor relations, said as the play matures, drillers are likely to concentrate on certain sweet spots where drilling might become denser.

“When they start out, they define a huge area, but the real core area is really 10 or 20 percent” of that, he said, referencing experience from other shale plays.

Even those firms that plan to slow production in the Marcellus are keeping the pain focused on the dry portion of the play.

This week, Chesapeake Energy, the largest leaseholder in the Marcellus with 1.8 million acres, reiterated plans to cut Marcellus production at least until 2013.

But while reducing its rig count in the dry portion from 10 to six, the wet area is losing only one rig from the current seven.